China Has Limited Firepower to Counter U.S. Tariffs

China's economy runs on two things:

• It's RE sector which is massively overbuilt and has come to a grinding halt.

• The manufacture of finished goods and processed materials to Europe and the US.

If Trump decides to enact tariffs, he'll also threaten the EU with such unless they follow suit against China. Then China's economy will face collapse.

Ergo, Trump has brought a machine gun to a knife fight. Will he use the weaponry? Only if Xi refuses to trade fairly and cease the theft of intellectual property. He'll blink else he'll get his ass handed to him.

Trump is taking advantage of the moment to negotiate with a prick for fair treatment.

China Has Limited Firepower to Counter U.S. Tariffs

While Beijing has already brandished the ways it could hit back at Trump’s levies, such retaliation risks boomeranging

By Jason Douglas, WSJ

Updated Dec. 29, 2024 2:40 am ET

China’s need to keep goods flowing to the West from its ports would be a weakness in a trade war with the U.S.

SINGAPORE—In the weeks since the election, China has flaunted the ways in which it could hit back at the U.S. in the event of a new trade war with the U.S., including everything from choking off the metals needed for everyday products to punishing American companies that do business in China.

But using such tools too aggressively risks backfiring on Beijing.

The big danger is that taking shots at Western companies and restricting exports of critical minerals and other essentials will only encourage the U.S. and its allies to double down on their efforts to untangle their economies from China’s.

That would spell trouble for Beijing as long as it remains wedded to an economic model that relies so heavily on selling its goods to Western consumers.

While China can inflict pain on the U.S. with the economic tools at its disposal, it is more likely to wield them sparingly, according to analysts. Instead, Beijing could use the measures to force talks to negotiate a truce with Donald Trump should he follow through on his promise to impose 60% tariffs on Chinese imports.

“Just using these tools willy-nilly doesn’t make sense. You have to be driving towards an outcome, which is some sort of negotiation,” said Logan Wright, head of China markets research at Rhodium Group, a New York-based think tank.

When Trump began hitting Chinese imports with tariffs in 2018, Beijing responded by raising tariffs of its own on imports of U.S. products such as food, chemicals and textiles.

With a more intense trade skirmish looming, Beijing has been showcasing the tools it has refined since the trade war during Trump’s first administration—tools it believes are more effective than a tit-for-tat escalation in tariffs.

In December, Beijing tightened controls on exports of raw materials used in the manufacture of advanced electronics and batteries and in other high-tech fields. That move was in response to the Biden administration’s decision to cut China’s access to certain memory chips used in artificial intelligence. Beijing has also extended controls over parts used in the manufacture of drones, which have proved vital to Ukraine’s defense against Russia’s full-scale invasion.

China also has announced an antitrust investigation of Nvidia, the U.S. chip juggernaut, saying it might have violated the terms of a conditional approval it received from Beijing in 2020 for its acquisition of an Israeli networking company.

Beijing also maintains an “unreliable entity list” of companies that face extra hurdles in doing business in China. In September, it said it was considering placing PVH, the owner of Calvin Klein and Tommy Hilfiger, on the list because of reports that the U.S. company had boycotted cotton products from China’s Xinjiang region, where China is accused of using forced labor in its factories. Beijing denies the forced-labor allegations.

Yet analysts said this mix of export restrictions and the targeting of U.S. companies isn’t such a potent set of countermeasures.

Although China dominates the production and refining of critical minerals, it isn’t the sole supplier worldwide. Last year the U.S. imported more raw gallium from Canada than it did from China, and its top supplier of processed germanium was Germany, according to Census Bureau data. Both minerals are critical to the production of semiconductors, missile systems and solar cells.

China’s dominance of critical minerals relies in part on its ability to supply global markets at low prices, making it uneconomic for rivals to invest in alternative production. But export controls risk pushing up the market price, changing that calculus.

“The more of a strain it is to get these things, the more investment goes into processing,” said Matthew Gertken, chief geopolitical strategist at BCA Research.

Moreover, as Russia’s ability to evade Western sanctions has shown, third countries are usually prepared to act as middlemen in global trade, allowing eager buyers to sidestep efforts by sellers to impose restrictions on sales to a particular country. If China got tough on exports of minerals to the U.S., American companies could potentially secure what they need through re-exports by third countries, Gertken said.

Nor is punishing U.S. companies that do business in China the potent threat it once was. China’s sluggish economy and its push to edge out Western brands in favor of domestic rivals mean many U.S. companies are struggling there. As a result, China has become less important to American corporations than it was.

General Motors said in December that it expects to take more than $5 billion in noncash charges in the fourth quarter. Weakness in its China business will force the automaker to close plants and offer fewer models there.

If Beijing were to squeeze U.S. companies operating in China, such a move could give the second Trump administration pause, particularly if it spooked the stock market. But it also might persuade U.S. companies to dial back their presence in China and dissuade new ones from investing.

“Every aggressive move by China accelerates U.S. companies’ diversification and decoupling efforts,” said Craig Singleton, senior China fellow at the nonpartisan Foundation for Defense of Democracies. “It’s a self-reinforcing cycle, much like China’s own economic spiral—Beijing’s actions ultimately weaken its hand further.”

Beijing has other options. There are many ways that China could retaliate using low-value and low-tech products, said Martin Lynge Rasmussen, senior strategist at Exante Data, a research firm. Such is China’s dominance of everyday manufactured goods—think screws, bolts, charging cables—that it has the potential to be downright annoying for American consumers. That could be politically costly for Trump.

“There are a lot of things that China could just choke off at little domestic cost,” he said.

China could also let its currency weaken against the dollar, giving its exports a leg up in world markets and in the U.S. and helping to offset higher tariffs. But such a move could drive capital flight from China, something Beijing is anxious to avoid. Most economists think Beijing might tolerate a limited and controlled devaluation, but not a steep slide in the yuan.

Finally, there is the nuclear option for Beijing of a fire sale of its vast holdings of U.S. Treasurys. China is the second-largest foreign holder of U.S. Treasurys after Japan, with $760 billion in holdings as of October, though some experts think the true size of its portfolio of Treasurys and other U.S. assets is much higher, perhaps as much as half of its $3.6 trillion in official reserves. Some said Beijing could consider such an extreme scenario if a trade conflict spiraled dramatically and it sought to cause financial chaos in response.

Yet economists point out that the Federal Reserve could step in to stabilize the bond market with open-ended purchases, just as it did in 2020. It then bought $1 trillion of Treasurys offloaded by foreign central banks and private-sector investors desperate for cash at the start of the pandemic. A fire sale would also leave Beijing with a lot of dollars that it would have to recycle into some other asset. Selling them and buying yuan would drive up the value of its own currency.

Overall, according to analysts, Beijing must be mindful of how its efforts to hit back at the U.S. will be viewed by the rest of the world. Just as some countries voice unease over their dependence on the dollar and the U.S. financial system, others might look askance at their dependence on China for manufactured goods.

“Ultimately, these are your customers. You have to keep them buying from you,” said Rhodium’s Wright. “One way or the other, Beijing has incentives to slow escalation.”